TCO in the manufacturing industry: “This is how I help customers to show hidden costs”

TCO in the manufacturing industry: “This is how I help customers to show hidden costs”

“I regularly hear this from customers: ‘We only do the development and sales of our product, Ruud, we like to leave the production to you’. That’s nice to hear, of course, but customers often don’t seem to know a lot of hidden costs during the transfer of production. Insight into the ‘total cost of ownership’ (TCO) is then indispensable”.

Ruud Willems is Commercial Manager at Multifix Assembly, he is happy to take over the production of customers. This does require some awareness, customers are often not aware of the ‘Total Cost of Ownership’ or TCO: “Using an Excel file I can make all hidden costs visible, which is often very enlightening for the customer”.

Why do customers need to become aware of their TCO?

“We often see that purchasers only look at the purchase prices of materials, sometimes not even at the work they have with it. They choose the lowest price, but compare apples with pears. They also often buy from different suppliers, but don’t realize that for each supplier they are wasting time and hidden costs on ordering, communicating, booking, reconciling invoices, keeping stock, you name it”.

“We have therefore developed an Excel file that also includes the hidden costs. Our work preparation department uses it to analyze the customer’s unit price when they outsource production to us, including transport from supplier to customer, storage, reject/recovery, you name it. This way, everything becomes visible.”

What are the other advantages of outsourcing?

“If a customer leaves the assembly of their product to us, he can use the employees that are freed up in other places. The personnel risks then lie with us, customers can focus on their core tasks. Often they still do the final assembly, they only outsource the subassemblies in order for the people on the assembly line to focus on the workflow of the final product”.

“We have a customer who supplies agricultural machinery; they recently developed an assembly line for their end products. Because our subassemblies and sets are finished on the line, they can focus on the final assembly. In this way the output is higher, or they need fewer people. Or as one customer said the other day, ‘now we can focus on our core business’.”

What does outsourcing mean for understanding TCO?

“When transferring production to Multifix, customers must of course realize that we have to make all costs visible. Many hidden costs are literally hidden, even from the customer. For one customer, the prices of their suppliers turned out to be ex-factory, so logistics costs had to be added. We have to take over the costs properly, no one benefits if we run a loss on every project”.

“Almost all buyers who ask us for a quotation only compare purchase prices, not the TCO. We call this ‘purchasing 1.0’. We try to convince our customers of ‘purchasing 2.0’, in this way they see the advantages of outsourcing and equal cooperation. Of course, customers get a good product for the best price, but on a long-term basis. They are then aware of the hidden costs, or at least understand them”.

That also means a different relationship with the customer?

“Previously the relationship with the customer was not equal, it felt like you were ‘opponents’. Now we stand ‘next to’ each other, we become part of the customer. You run together, the trust and partnership grows, that’s really ‘purchasing 2.0’. Their problems are your problems, but also the other way around. If a customer suddenly needs a lot and we have to switch up quickly, we can often make use of their network.

“I spoke to a buyer the other day, he made clever use of the two-bin system for purchasing fasteners. In the long term this is the best approach, considering the TCO, but in the short term it seems more expensive. He therefore received criticism from the head office in France, where they still bought full boxes. He pointed them to their hidden costs, such as repacking on the line, when they understood this the criticism disappeared. A good example of awareness of TCO, I’m happy to help buyers with that”.